Five investment hazards

Five investment hazards
After HSBC is fined for mis-selling investment bonds, we look at the products that tempt buyers to take inappropriate risks.

Investment hazards to avoid Photo: Alamy

By Emma Simon

7:00AM GMT 10 Dec 2011

As we draw closer to the ban on commission payments on financial products, which will take effect in 2013, there is growing concern about a rise in the mis-selling of products and fears that some advisers and salesmen are grabbing what they can now.

"I've never seen so many cases of poor advice as I have in the last six months – from advisers 'churning' pension plans to selling unregulated products such as overseas property investments," said Philippa Gee of Philippa Gee Wealth Management. In some cases, she said, advisers were pocketing between 8pc and 10pc of the investment.

"We never see clients who have been mis-sold a National Savings product or a cheap tracker fund," said Ms Gee. "Inevitably, they've been sold a product they don't fully understand and are taking too much risk with their money. But the adviser has received a generous commission fee for it."

Alarm bells should ring if any adviser recommends a product where there is a toxic mix of high charges, commissions and complex terms. This doesn't mean that there aren't certain cases where such products may be appropriate. But evidence suggests that these are few and far between. Despite this, such products are sold to thousands of consumers each year.

With less scrupulous advisers making hay while they can, and the difficult investment environment perhaps tempting consumers to take risks, we look at five products where you should always think twice before signing on the dotted line.

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Investment bonds

These made headlines this week when HSBC was fined £10.3m for selling bonds to elderly customers to pay nursing home fees. Regulators ruled that the bonds were mis-sold, given that the customers' average age was 83 and that there were penalties on withdrawals within five years, as well as a degree of investment risk.

These bonds aren't sold just to people needing long-term care. They are routinely offered to those with a sizeable cash sum to invest, whether they're saving for retirement or supplementing a pension. Ms Gee said: "Whenever I see a customer who's been ripped off, they've almost always been sold an investment bond."

These bonds are typically sold by insurers and allow customers to invest in a range of underlying funds. Their main advantage is that investors can withdraw 5pc of their capital each year without incurring a tax charge. But if the investment growth is less than this, capital can quickly deplete.

Most people are investing tens of thousands of pounds in these bonds (the average investment with HSBC was £115,000) and advisers earn commission of 6pc to 8pc. Investors should ask whether a diversified spread of low-cost equity or fixed-interest funds would be better. Ms Gee said: "Undoubtedly these bonds are oversold. I've advised hundreds of clients, but there's only one case I can think of where this was the most suitable product."

Structured products

These purport to offer a simple solution to nervous investors: get exposure to equity returns without putting your money at risk. Sadly, you will get far less than the market return (most investors don't get dividends, for example) and your capital could still be at risk.

Behind this persuasive "sell" are complex products that rely on derivatives and expose you to counterparty risk. Before signing up, make sure you are clear what the risks are and what return you will get. Santander recently sold "guaranteed" bonds which, it later admitted, weren't fully guaranteed, because of counterparty risk.

As with many types of investment, it's a mixed bag, with good, bad and downright ugly versions. Some structured deposits will be covered by the Financial Services Compensation Scheme (FSCS), so even if the bank selling it, or the counterparty underwriting the deal, went bust, up to £85,000 of your money would be protected. Others are "structured investments" where money can fall at twice the rate of the stock market in certain conditions. Always ask what the downside risk is, both in terms of market falls and the unlikely event of a bank backing it going bust.

"If you are not happy with stock market risk, I would not advise being in the stock market at all," said Ms Gee. "A well-diversified portfolio can often be a better way of managing such risks."

Multi-manager funds

Here, investors are paying a double layer of charges, often without any significant boost to performance. David Norman, the joint chief executive of TCF Investment, pointed out that the typical TER (total expense ratio) on unit trusts was 1.7pc, but on a multi-manager fund the average was 2.3pc, with many funds charging closer to 3pc.

These figures don't include dealing costs or any upfront fees. Some multi-managers don't include the charges on exchange-traded funds either, meaning the published TER may bear little resemblance to the charges deducted from your fund every year.

"Long-term investors are looking to beat inflation," said Mr Norman. "Historically, equities deliver 4.5pc more than gilts. But if you are paying more than 3pc to get a 4.5pc return, it's like trying to go up the down escalator."

These aren't just niche products, aimed solely at high-net-worth investors. Increasingly, these are the default options offered by a banks, including HSBC, Santander and RBS. Mr Norman added: "The principle of diversification is good, so these funds seem a simple, sensible option. But in a low-return environment it's important to keep an eye on costs. Most of these funds are charging too much."

Inflation-linked bonds

Popular at present are bonds where returns are linked to the retail prices index, rather than the stock market. With RPI now standing at 5.4pc and most banks paying less than 2pc, it's not hard to see why they are selling well. But investors should ensure they understand the more complex terms and conditions. If an account pays RPI plus 1pc, this does not mean you get 6.4pc today. Most are five-year accounts, and the return will be the difference in prices between now and the maturity date. Many people are expecting inflation to fall next year, once the rise in VAT drops out of the year-on-year calculation. As with structured products, there may be counterparty risks as well, although most are "structured deposits" that will be covered by the FSCS.

Exchange-traded funds (ETFs)

ETFs don't pay commission and have very low charges. So how can consumers go wrong? Sadly, they are far from simple products. There are physical ETFs, where the manager holds the shares or commodities of the index being tracked. But there are also synthetic versions, where there can be tracking errors and problems with liquidity if too many holders try to sell quickly. Many of these rely on complex derivatives. Worse, some offer "geared exposure", where the fund borrows to boost returns – but this can magnify losses if the market is against you.

Richard Saunders, the chief executive of the Investment Management Association, warned customers to make sure they knew what type of ETF they were buying. The term ETF is often used to describe their riskier cousins, known as exchange-traded products (ETPs), which don't offer the same level of investor protection. Investors should also ensure they look at all charges. The iShares FTSE 100 ETF has an expense ratio of only 0.4pc but annual platform charges make it more expensive than the Fidelity Moneybuilder UK Index fund or the Vanguard FTSE UK Equity Index fund.

Gary Shaughnessy of Fidelity said: "Fees reduce the value of your investments, so everyone should be clear about what they are paying. It's like deciding to fly with a flagship airline or its no-frills rival. There's more to the comparison than the eye-catching price in the advert. If you've been stung by extra charges for baggage, checking in and so on, you know that what matters is the total cost."


http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html

What's your business really worth?

What's your business really worth?
Max Newnham
December 12, 2011 - 2:16PM


There's no foolproof rule for working out the value of a business.
One of the sad truths is that people who buy small businesses often don't get advice until after they have made the purchase. This can lead to too much being paid for a business or it being owned by the wrong legal entity.

People selling businesses justify their selling price by the profit produced. When this profit does not include a salary that should have been paid to the owner, the purchaser can pay a lot for what in reality is a job rather than a business. If the plan is to own and operate a business and then sell it for a profit a company is the worst structure to use, followed closely by a unit trust.

Q. My sister and I have run a small cattery for a bit over 10 years on our property of 10 acres. I am over 65, and we are thinking of selling because I want to cut back my workload. The business turns over almost $100,000 a year and after all costs, including wages, we make a net profit of $15,000 a year. We have been told the real estate is worth about $650,000 and are not sure what to ask for the business. Can you tell us how to value the business and what tax will we pay on the sale?

A. There is no hard and fast rule for working out the value of a business. Some industries base the value on the turnover, such as professional practices like accountants, while others have established valuation methods that are peculiar to their industry, such as newsagents.

Using accounting principles the goodwill value of a business is calculated by multiplying the sustainable net profit by a factor that relates to the risks associated with the business. Sustainable net profit is calculated by increasing the profit of a business for ownership costs, such as interest on borrowings, and decreasing it to allow for wages that have not been taken by owners that work in the business.

If your profit includes wages paid to you for the hours you have both worked, and there has been no interest deducted, your business could be worth between $45,000 and $90,000. The lower a purchaser perceives the risk, or the more they are attracted to the lifestyle of your business, the more they will be prepared to pay.

Because you live on the property, the profit on the real estate will need to be split between your residence and the business. No tax will be payable on the gain you make on the sale of the portion relating to your home.

As you own the business through a partnership, the profit on the sale of the rest of the property, and what you get for the goodwill of the business, will be decreased by the general 50 per cent discount and the 50 per cent active asset discount. The remaining profit will not be taxable if you claim the small business retirement exemption.



Read more: http://www.smh.com.au/small-business/finance/whats-your-business-really-worth-20111212-1oqs7.html#ixzz1gMrsAwXK

QUICKIES: Seven investment myths you should not fall for

Text: Prerna Katiyar | ET Bureau

Pick this stock, it's trading at 52-week low.' 'That stock is a multi-bagger, trading at such a low PE.' 'Penny stocks make fortunes while stocks trading below book value are a sure pick for making quick bucks.'

Haven't we all heard such statements at some point in our lives? If you are one of those who believe in such assertions, read on. For, these are among the many myths in investing.



Here we list seven of them


Myth No 1: Stocks trading below book value are cheap

Book value (BV) is the actual worth of a stock as in a company's books/balance sheet, or the cost of an asset minus accumulated depreciation.

BV depends more on historical cost and depreciation and often has little correlation to the current share price.

Shares of industries that are capital intensive trade at lower price/ book ratios, as they generate lower earnings. On the other hand, those business models that have more human capital will fetch higher earnings and will trade at higher price/book ratios.

"Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company ," says Angel Broking's equity derivatives head Siddarth Bhamre.


Myth No 2: Stocks trading at low P/E are under-valued

Price to earning ratio (P/E) is one of the most talked about ratios in the market. This is based on the theory that stocks with low P/Es are cheap.

However, P/E alone doesn't tell much about the stock price. P/E multiples may be a quick way to value a stock but one should look at this in correlation with expected growth earnings, the risk factors involved, company's performance and growth potential .

"This is surely a myth. It is also an indication of uncertain future earning of the stock concerned," says Birla Sunlife Mutual Fund CEO A Balasubramanian.

The idea behind dividing price with earnings is to create a levelplaying field where some kind of comparison can be made between high- and low-priced stocks.

Since P/E ratios vary across sectors, with growth stocks consistently trading at higher P/E, one can only compare the P/E ratio of a stock to the average P/E ratio of stocks in that sector.


Myth No. 3: Penny stocks make good fortunes

Penny stocks by nature are lowpriced , speculative and risky because of their limited liquidity, following and disclosure.

If it's easy to invest in penny stocks - as here you shell out much less money per share than you would require for a blue-chip firm - it's also easy to lose.

Says Bhamre, "Fortune can be made by high-denomination stocks also. Denomination has nothing to do with the rationale for picking a stock. Generally , retail investors are fond of stocks that are at sub- Rs 100 levels. But there may be stocks that may be trading in Rs 1,000-plus price but may well be cheap. Clarity on earnings is more important here. Anytime, I would be more comfortable buying an ICICI Bank (currently trading at Rs 1,038) than an IFCI at Rs 45. One should look at earnings visibility."


Myth No. 4: The worst is over in the stock market

Timing the market, a common strategy among investors, means forecasting and that should best be left to astrologers and tarot readers.

If one has done one's valuation studies, one shouldn't worry about timing the market. No one had predicted the bull run would take the Sensex from a level of 10,000 in February 2006 to over 21,000 in January 2008 - just as no one had any idea of the following crash, which saw the same index plummeting to 9,000 in March 2009.

"Timing the market is more of a gut feeling. It's more on the basis of perception, as there is no such thing (that the worst is over) when the future is uncertain. One can never surely time the market. The worst is over is more of a probability than a certainty. Timing the market is very difficult as market is driven not just by earnings but also by sentiments ," says Balasubramanian.


Myth No 5: Stocks that give high dividends are the best bet

This comes from the notion that regular dividends are extra income in the shareholder's hand. This may not always be true.

While a company may be making decent payouts every year, the share price appreciation may not be comparatively high. Before investing in companies paying high dividends, it's important to analyse if the company is reinvesting enough profit to grow its earnings consistently.

Says Brics Securities' research VP Sonam Udasi: "It's not dividend that matters but the yield. For eg, a company may pay a 100% or even a 300% dividend on a stock with face value of Rs 10.

So, the investor may receive Rs 10 or Rs 30 per share when the stock may be currently trading at Rs 800 or Rs 1000. This would translate into an yield of 1% or 3% only. Also, such companies may not necessarily be reinvesting their earnings in the business to generate future earnings and so there may be no stock movement. The dividend may be high but the EPS and growth per se may be constant."



Myth N0 6: Index stocks are the best stocks

If this was true, most investors would safely park their money in such stocks in anticipation of maximum profit without looking out for other value stocks.

Most indices are a collection of stocks with the highest market cap. Take, for eg, the Sensex.

Companies that make up the index are some of the largest, with stocks that are highly traded based on their free-float.

"Index stocks may not necessarily be the best stocks as they are mostly based on market-cap or free-float of the company and not earnings. This doesn't mean that all stocks of the Sensex are highearning stocks. One must take a stock-by-stock call," says Balasubramanian of Birla Sun Life Mutual Fund.

The stock price of a company depends on its earnings. One can find high-earning stocks outside the key indices as well, he says. The risk is certainly less with index stocks as they are well researched and leaders in their respective sectors, but, again, the margins may not be very high. So it's better to keep your eyes open to other stocks, too.



Myth No 7: Stocks trading at 52-week low are cheap

Says Udasi: "There may be a time in the economic cycle when a blue-chip stock may hit a 52-week low.

But the first thing that should come to one's mind is why did the stock hit the 52-week low.

There must be something fundamentally wrong with the stock if it has hit a 52-week low, and chances are they may hit a new 52-week low.

52-week low in itself guarantees nothing. If at all one is picking stocks at 52-week lows, they should have a long-term horizon so that when the economic cycle turns, the stock is able to recover."

Needless to say, quality matters most while buying any stock.


http://economictimes.indiatimes.com/seven-investment-myths-you-should-not-fall-for/quickiearticleshow/9438662.cms

Outlook 2012: Markets to remain volatile, uncertain

http://economictimes.indiatimes.com/markets/analysis/outlook-2012-markets-to-remain-volatile-uncertain/articleshow/10987167.cms?curpg=2

The most preferred emerging markets

http://economictimes.indiatimes.com/markets/global-markets/Emerging-markets-prospects-brighten-amid-Euro-zone-concerns/articleshow/10880321.cms

2 MAY, 2011, 04.14AM IST, SAMEER BHARDWAJ,ET BUREAU 

Selection strategy: Select those equity funds that have done well in both bear and bull markets

How does one identify the best equity mutual funds? Depending on the financial planner you approach, you will get a variety of answers. Some advocate an analysis of historical returns. Determine your investment tenure, they say, and pick the top funds in the given time frame. 

So, if you want to invest for three years, the adviser will suggest the funds that have given the highest returns in the past three years. Some ask for your age and investment goals, and then offer a list of funds whose investment objectives match yours closely. If you are young and ready to bear high risk, the planner will suggest sectoral, mid- or small-cap funds. Yet others talk of statistics and risk-adjusted returns, supporting funds with high alpha, beta, Treynor or Sharpe ratios. 

All these methods are useful, but fund performance varies in different market conditions. So, we have figured out another way to help identify the best equity funds. We zero in on those that have done well in both bear and bull markets. A fund that does well in a bull market may be affected the most in a bear phase because even stocks with good fundamentals are hammered during a bad phase. 

There may be no noticeable reason for a reduction in stock price, but it falls due to its high sensitivity to the market. Under such conditions, the fund managers who can shift from stocks to liquid instruments or cash tend to lose less than the market. Similarly, as the market turns bullish, the fund managers who have the ability to identify undervalued quality stocks gain more than the market. 
Here's how we picked the funds that did well in both the bear and bull phases. For the bear market, we analysed the returns between 8 January 2008 and 5 March 2009. The Sensex fell from 20,800 to 8,200 during this period and lost 61%; the Nifty lost 59% and equity mutual funds (on an average) lost 62%. For the bull market, we considered the returns between 6 March 2009 and 3 January 2011. The Sensex went up from 8,200 to 20,500 in this period, gaining 147%. The Nifty gained 135%, while the equity mutual funds (on an average) gained 153% in the same period. All the returns are in absolute terms. 

Next, we identified the funds that had lost less than their benchmarks and category averages in the bear phase and gained more in the bull phase. We analysed all equity mutual funds, including diversified, tax plans, sectoral funds, contra and dividend yield funds. Of the 366 funds, 25 satisfied the criterion. These were the true outperformers, having done so in both the bull and bear phases. 
The HDFC AMC tops with its five funds. Fidelity and Reliance AMCs shared the second spot with four funds each. The ones from Birla Sun Life, Franklin and Religare shared the third spot with two funds each. Canara, IDFC, ING, Principal, Sahara and UTI AMCs have one fund each in the list. 

http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/selection-strategy-select-those-equity-funds-that-have-done-well-in-both-bear-and-bull-markets/articleshow/8125386.cms

Tata Communications: With steady growth analysts shifting their stance to 'hold' or 'buy'

http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/tata-communications-with-steady-growth-analysts-shifting-their-stance-to-hold-or-buy/articleshow/10988789.cms

How the role of fund manager differs from a planner

11 JUL, 2011, 01.30AM IST, UMA SHASHIKANT,
How the role of fund manager differs from a planner

The investors who have been worried about the lacklustre performance of equity markets are beginning to ask a simple question. If fund managers are experts in investment, shouldn't they have seen this coming and protected their portfolios?

After all, most people invest in mutual funds so that their money remains protected from uncertainty. This may be a common expectation from mutual funds, but it is completely wrong. Fund managers cannot directly manage risks for investors; they are not even privy to it. The confusion stems from the fact that the roles of a fund manager and financial adviser are often mixed.

Mutual fund products are not tailored to the needs of a specific investor. They are created to mimic an asset class. So a large-cap fund is expected to invest in a portfolio of large stocks and enable an investor to gain exposure to this asset class. What an active fund manager does is to try and perform better than a large-cap market index such as the Nifty.

An investor has the cheaper option of buying a passive index fund to get the same exposure. An active fund manager takes a higher fee to alter weightages in sectors and stocks in the large-cap universe to better the benchmark index. However, if this fund liquidates the equity portfolio and holds cash because the fund manager thinks that the market is due for a correction, the portfolio would actually move away from its mandate.

First, it will underperform the index if the cash call turns out to be wrong and the market moves up. Second, there is no reason for someone to pay a fee of 2.5% for holding cash when he can put it in a liquid fund at a cost of 0.35%.

It is the job of a financial adviser to review the investors' exposure to large-cap equity, take on board the downside risks at the time, consider the risk appetite of the investor, and recommend a tactical change in weightage. It is the adviser who is privy to the investor's return targets and risk preference, who should seek liquidation of the portfolio and advise the investor to hold cash. If the adviser has already done so, the fund manager's action is superfluous and can reduce exposure to equity more than is necessary.

The fund manager's specialisation is the bottom-up research in companies and sectors, as well as the selection, timing, assigning of weightages and rotation of stocks and sectors that he holds. The specialisation of the adviser is top-down research, which should indicate how asset classes will behave and, therefore, decide the weightage in an investor's portfolio. If the fund manager's job is to deliver relative performance, it is the work of the adviser to deliver absolute performance in line with the investor's needs.

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/how-the-role-of-fund-manager-differs-from-a-planner/articleshow/9162198.cms

Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement in UK.

Your pension will be £1,750 a year less


Private sector workers without gold-plated final salary pensions can expect to receive £145 less a month in retirement than was projected just two years ago.

Annuity prices - which dictate your pension income - have increased by an average of 20pc since 2009 Photo: GETTY

By Paul Farrow

12:37PM GMT 12 Dec 2011

Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement.

According to Mercers, the actuarial consultancy, a 50 year-old can currently expect to receive £145 less a month, or £1,740 a year, in retirement income than was projected in 2009. A person in their thirties will be around £100 a month worse off.

The calculations showed that annuity prices – which dictate your pension income – have increased by an average of 20pc since 2009, hampering members' chances of obtaining a good retirement income.

This dramatic increase has meant that someone with a defined contribution pension pot of £200,000 at age 65 can now expect to get an annuity income of around only £5,800 a year, compared with £7,000 a year in 2009. Mercer said that a person nearing retirement might need to work for over three years longer in order to retire on the same income that they expected based on conditions back in 2009.

The decline in prospective pension values has been accentuated by a drop in contribution levels – employees are paying less in than they used to (an average of 4.2pc), while employers have frozen contribution rates, at an average of 7.2pc of a worker's salary, over the past year.

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Tony Pugh of Mercer said: "When considering the financial and regulatory pressures pension schemes are facing, the stagnation in employer contributions doesn't come as a big surprise. With a double-dip recession looming things are likely to get worse before they get better.

"We expect, however, that rates will trend upwards again over the long term, as employers start to recognise that lowering contributions to defined contribution schemes will change the workforce profile as a result of older employees having to work longer. Equally, employee pressure to increase contributions is likely to have an impact.

He added: "The impact on individual members is significant, especially for those about to retire. Members should keep a close eye on how their pension pot is invested and make sure to shop around for annuities to get the best out of their retirement savings.

"Those eligible are likely to increasingly use drawdown options, but these are not without risk as investment values could fall."

http://www.telegraph.co.uk/finance/personalfinance/pensions/8950888/Your-pension-will-be-1750-a-year-less.html

Ask an expert: Shares v houses

Shares v houses
March 2, 2011

Question: The idea of common sense investing needs to be taught as a mandatory subject in our education system. But if you BUY Australian blue chips stocks and hold them over your lifetime the magic rule of 72, with marvelous compounding effects will return profits far in excess of an average residential home.


Take for example Westfield shopping Centers, if you invested just $1,000 back in 1960 and then reinvested the dividends, it would now be worth over $132 million dollars!!!


The average house purchased for $1,000 at that time would now only be worth around $500,000. That means shares outperform houses by a margin of over 264 times!!!


I not recommending buying Westfield shares, but what I'm saying is the investment thought process in this country is too biased towards real estate, through elements like our parents, media, political benefits, etc.


Over our lifetime there are much more rewarding investments we could make. The most intelligent advice I could give any young couple now would be something that most people don't want to hear!


Don't buy an OVERPRICED house, instead invest all your savings into the Big 4 Bank stocks, so you can retire much earlier from receiving Fully Franked TAX FREE dividends from all the other sheep in mortgage stress for the next 30+ years.


"Fortune favors the brave"



Answer: Australia seems to be divided into share lovers and property lovers and I tend to be on your side. The benefit of shares is that you can buy and sell quickly and in part and never have the worries of maintenance, land tax, vacancies, etc. On the other hand you can't generalise about the property market as some properties have done spectacularly well. For most people a diversified portfolio is still the way to go.


Read more: http://www.smh.com.au/money/ask-an-expert/blogs/ask-an-expert/shares-v-houses-20110301-1bcfu.html#ixzz1gHDqVARv

Investing an inheritance
March 9, 2011

Question: I am 23 years old and have recently inherited $100,000. I am uncertain as to whether I should simply leave this money in a high interest cash account, or invest in shares. Although I have studied some finance, I am unsure as to where I should go for impartial share advice. What is the best thing to do with this amount of cash at present?


Answer: Your best strategy depends on your goals because it is unwise to invest money in property or shares unless you have at least a seven to ten year timeframe in mind. Leave it in a high interest online cash account while you examine your options but cash is probably the best place for it if you are thinking about buying a house in the next three or four years.



Read more: http://www.smh.com.au/money/ask-an-expert/blogs/ask-an-expert/investing-an-inheritance-20110307-1bkop.html#ixzz1gHF0FT5a

Why invest directly?

Why invest directly?

Direct investment gives the investor control over those assets and investments, including the making of decisions relating to those investments and their day-to-day management and administration.  Accordingly, direct investment will suit those investors with the time and expertise required to manage their own affairs, either by themselves, or in conjunction with an adviser.

Direct share investments offer a number of advantages:

• Liquidity (quick conversion to cash)
• Daily valuation of your investment
• Growth through new issues (e.g. bonus issues)
• Flexibility
• Safeguards/security 
• Free and open market
• Convenient and easy transferred ownership, and
• Usually no holding cost once purchased.

http://www.asx.com.au/courses/shares/course_09/index.html?shares_course_09

Investment checklist:  Liquidity, Valuation, Stock Exchange lsited, Cost effective

Share market investment strategies: General planning tips

Share market investment strategies:  General planning tips

Never buy shares on tips or rumours alone.  Try and understand the type of business the company is involved in before you invest.

Remember, the higher the potential return, the greater the risk.  Real rates of return (i.e. adjusted for tax and inflation) average around 4 percent to 5 percent per annum over the longer term (seven to ten years).  Don't be misled by apparently impressive historical investment statistics:  past performance is no indication of things to come.

Keep your portfolio manageable by concentrating on a relatively small number of quality investments.  To do this, avoid acquiring lots of speculative stocks.

Check the liquidity of each investment (how long it takes for your money to be returned if you decide to cash out).

Understand all transaction cost, including early withdrawal penalties and tax implications.

Always maintain an adequate cash reserve to cover unexpected expenditures, emergencies and new investment opportunities.

To minimise risk and maximise growth, you should assess how much risk you are prepared to take and spread your investments across several investment types and different companies.



http://www.asx.com.au/courses/shares/course_09/index.html?shares_course_09

The objective of fundamental analysis is to determine a company's intrinsic value or its growth prospects.

Fundamental analysis

Fundamental analysis is the study of the various factors that affect a company's earnings and dividends.  Fundamental analysis studies the relationship between a company's share price and the various elements of its financial position and performance.

Fundamental analysis also involves a detailed examination of the company's competitors, the industry or sector it is a member of and the broader economy.

Fundamental analysis is forward looking even though the data used is by and large historical.  The objective of fundamental analysis is to determine a company's intrinsic value or its growth prospects.  This intrinsic value can be compared to the current value of the company as measured by the share price.  If the shares are trading at less than the intrinsic value then the shares may be seen as good value.

Many people use fundamental analysis to select a company to invest in, and technical analysis to help make their buy and sell decisions.

Factors affecting future earnings prospects of a company:

1. Change in senior management
2. New efficiency measures
3. Product innovations
4. Acquisition of another business
5. Industrial action

Analysing individual companies

The analysis of an individual company has two components:

-  The 'story' - what the company does, what its outlook is
-  The 'numbers' - the financials of the company, balance sheet and income statement and ratio analysis.

Unfortunately, balance sheet and ratio analysis is probably the most daunting part of fundamental analysis for non-professional investors.  A large number of numerical techniques appear to be used.  However, you can make it less painful by adopting a methodical approach and by always remembering that behind all the numbers is a real business run by real people producing real goods and services, this is the part we call "the story".

It is unlikely that you will need to do the number crunching for every company, your time will be more profitably spent developing the company story.  Balance sheets and ratio analysis, both historical and forecast, can be obtained from either a full service or discount stockbroker.


What are you trying to learn about a company?

Before trying to leap into the calculations behind fundamental analysis there are some basic questions that are worth considering as a starting point:

1. Where is the growth in the company coming from?
2. Is the growth being achieved organically or through acquisition?
3. Is turnover keeping pace with the sector and with competitors?
4. What about the profit margin - is it growing?  Is it too high compared to competitors?  If it is too high then new competitors could enter on price reducing margins.  Low earnings could suggest control of the cost base has been lost or factors outside the company's control are squeezing margins.
5. To what extent do profits reflect one-off events?
6. Will profits be sustainable over the long term?

Companies are multidimensional.  For example, debt funding may have increased - this may be a positive move if the funds produce new productive assets.



Fundamental analysis (Summary)

When you buy shares you are becoming a part owner in that business.

To make an informed decision if you want to be an owner in that business, it is important to understand how that company operates and what its prospects are.

To understand a company, you can read its annual report which is one of the most important publications it releases to the market.

Analysing an annual report gives you the ability to build a good picture of how that business has performed over the past 12 months and what its prospects might be for the future.

To compare the annual reports and prospects of different companies, there are commonly used financial ratios, these include dividend per share, dividend yield, PE ratio and earnings per share.



http://www.asx.com.au/courses/shares/course_10/index.html?shares_course_10

The annual report should be an essential read for all current and potential shareholders to a company.

While the share price tables in the newspaper provide a useful summary of company information, they are limited because their price information is historical and the data only represents part of the company story.  

The share price tables in the business section of  the newspaper provide an excellent summary of key information on a company.  They generally show the previous day's closing price, price range, upcoming dividends, yield and PE ratio.  The detail will vary depending on the newspaper.  By its nature this information is always going to be dated and does not provide an investor with other important elements to the company's story, such as management experience, recent business developments and what their competitors are doing.


What document are these crucial information sources found in:  Director's report, company financial tables, corporate governance report, and largest shareholders table?  Answer:  Annual report.


The annual report should be an essential read for all current and potential shareholders to a company.  It contains key information on the current and expected future health of a company.


http://www.asx.com.au/courses/shares/course_07/index.html?shares_course_07

Why is it important to regularly review your share portfolio?

Why is it important to regularly review your share portfolio?

Answer:  To determine whether your investment goals are being met.


You need to review your portfolio regularly to ensure your investment goals are being met.  To maximise your investment potential, you will want to be proactive rather than being forced to react to market trends.  Speculative stocks will need to be monitored more frequently than blue chip stocks, but even the latter need regular review to ensure they are serving the purpose for which you bought them.

An important skill when reading articles in the press is to identify the difference between fact and opinion.

FINANCIAL NEWS
THIS WEEK
STOCKS SET TO SIZZLE
Joe's BBQs Ltd shares are set to soar after the recent Consumer group survey revealed that 95% of all Australian households are set to update their outdoor entertaining facilities this summer. 
A spokesperson for the Consumer Group survey stated "The survey results indicate a widespread consensus among Australians that it is time to update their BBQs."
Market analysts will be watching the share prices of outdoor furniture and accessory retailers with keen interest when the market opens this morning.


Test your knowledge.

1.  In the "Stocks set to sizzle" article is the comment about the future movements of Joe's BBQs shares:
-  Fact
-  Opinion.

Feedback:
Answer:  Opinion

While the information from the Consumer Group survey is fact, the comment about the future performance of Joe's BBQs Ltd shares is the opinion of the article's writer.  An important skill when reading articles in the press is to identify the difference between fact and opinion.  Before agreeing with a writer's opinion you may want to review the logic that they used to reach their conclusion.




WORLD NEWS
8.34am  Reserve Bank drops interest rates.
At the Reserve Bank's monthly meeting yesterday it decided to ease Monetary Policy and reduce interest rates by a quarter of one percent.  
The RBA quoted the reduced inflationary pressure in the economy and the falling levels of business investment as the key reasons behind the decision to lower interest rates.


Test your knowledge

2.  Does a drop in interest rates generally have a
-  Positive effect on the sharemarket
-  Negative effect on the sharemarket.

Feedback
Answer:  Positive effect on the sharemarket.

Interest Rates reflect the cost of borrowing.  The higher interest rates are, the more expensive it is to borrow money.  Higher interest rates also mean both individuals and companies have higher repayments on outstanding loans.

Test your knowledge

3.  Do these two articles alone contain enough information to base a decision to buy shares in Joe's BBQs Ltd?
-  Yes
-  No

Feedback
Answer:  No

While articles like these may provide the spark to motivate you to investigate, a crucial step before any share purchase is to review the company announcements released by your target company.  First you will need to get more information about Joe's BBQs Ltd from the ASX website.


http://www.asx.com.au/courses/shares/course_06/index.html?shares_course_06

The benefits of having an investment philosophy and strategy

The benefits of having a strategy to support your investing are:
- the removal of subjectivity
- consistency in your investment decisions
- the ability to repeat your successes and avoid repeating your mistakes.

A strategy is simply a set of rules or guidelines that are adopted consistently over time.  Having a strategy does not prevent you from having losses though.  By documenting your approach to investing you can help remove the emotive element to making a decision by ensuring that you have developed a solid argument to support your investment decision.  Another advantage of having documented your approach to decision making means that your have a record of how you achieved your successful results to help you repeat them.

How to decide what shares to buy?

How to decide what to buy?

When it comes to deciding what shares to buy, the most important thing to consider is your investment goals, in particular, the performance goals you set for the share investments portion of your portfolio.

For example, you might be aiming to achieve an average after-tax dividend yield of 4% p.a. and capital growth of 8% p.a. over the next 10 years.  In that case, you could buy some shares that provide reliable, tax-effective dividends and the expectation of solid year-on-year growth.

Alongside long term investing, there are share trading opportunities that offer the chance to grow your investment capital more quickly.  Active or daily trading carries with it certain risks that need to be considered carefully.  With this in mind, looking at the range of categories that shares fall into can be a useful place to start.

(Long term investors aim to capture an upward trend in market value.  Short term investors try to capture value from the volatility in the share market.)

Income shares - Pay larger dividends, compared to other types of shares, that can be used to generate income without selling the shares, but the share price generally does not rise very quickly.

Blue chip shares - Issued by companies with long histories of growth and stability.  Blue chip shares usually pay regular dividends and generally maintain a fairly steady price trend.

Growth shares -  Issued by entrepreneurial companies experiencing a faster rate of growth than their general industries.  These shares normally pay little or no dividends because the company needs most or all of its earnings to finance expansion.

Cyclical shares -  Issued by companies that are affected by general economic trends.  The share prices tend to fall during periods of economic recession and rise during economic booms.  For example, mining, heavy machinery, and home building companies.

Defensive shares -  The opposite of cyclical shares.  Companies producing staples such as food, beverages, pharmaceuticals and insurance issue defensive shares.  They typically maintain their value during economic downturns.


http://www.asx.com.au/courses/shares/course_01/index.html?shares_course_01

Record keeping to monitor and manage the performance of your portfolio of shares.

Keeping records of your shares

Many investors put considerable time and effort into the initial planning of their portfolio and choosing the shares they buy.  Yet for some reason, many don't put the same time and effort into monitoring and managing the performance of their portfolio once it has been established.


Regular review of your portfolio is vital to establish whether your investment goals are being met. #    Many investors have a complacent attitude to investing.  As a result, they lack the market information necessary to make informed investment decisions, are forced to behave reactively and may end up losing out.  However by tracking your portfolio, you will give yourself the chance to plan ahead and take advantage of opportunities such as buying more shares in a particular company that, by your reckoning, is trading at a discount.

Example:
June - Check portfolio
July - Talk to accountant
August - Rebalance portfolio
September - Take sharemarket education course
October - Update dividend information in portfolio records
November -
December - Talk to advisor.

As the sharemarket is continually changing, it requires regular attention, yet there are no hard and fast rules as to how often a portfolio should be monitored.  The performance of volatile shares may need to be checked several times a day, while more stable large capitalisation companies can be reviewed at longer intervals.

To track your portfolio effectively, you need to know where to locate useful information and be able to understand how it affects the shares you own.

You may be liable to pay tax on any  money you make from shares in the form of income or capital gain in certain countries.  These tax offices of these countries will need details of both income and capital gains (or losses) that you make to calculate the tax you may owe.  However, by maintaining simple, accurate and complete records you will be able to ensure that you pay the appropriate tax without incurring large accounting fees.

If you do want to do the record keeping yourself, the 2 main types of records required to keep track of sharemarket investments are:

1.  Records relating to income for income tax purposes, including, dividend, dividend reinvestment or interest payment advice slips all of which generally are issued by company share registries to the holder's registered address; and

2.  Records relating to purchase and sale prices for capital gains tax purposes, including contract notes, copies of applications made for initial public offerings, dividend reinvestment and bonus shares plan advice slips.

Generally records are required to be kept for 5 years.  However, the events that mark the beginning or the end of the retention period vary according to the relevant provisions of the particular law.

Computer software packages and ledger sheets are available to assist you with your record keeping.  If you prefer to keep paper-based as opposed to computer-based records, an investment ledger will provide you with an easy and convenient way to keep records of your share transactions.


http://www.asx.com.au/courses/shares/course_07/index.html?shares_course_07
Download example spreadsheets for keeping track of your shares.


 #  For example, you might be aiming to achieve an average after-tax dividend yield of 4% p.a. and capital growth of 8% p.a. over the next 10 years.  In that case, you could buy some shares that provide reliable, tax-effective dividends and the expectation of solid year-on-year growth.